MINERAL VALUATION & TAXATION COMMITTEE MEETING MINUTES

State Capitol - Room  302

CHEYENNE, WYOMING – July 2, 2001

(Corrections to minutes made August 2, 2001)

Committee Members

7 Present:  Cochairman Senator Bill Hawks, Senator Ken Decaria, Senator Robert Peck, Representative Chris Boswell, Representative Roy Cohee, Representative Nick Deegan, Representative John Hines.  5 Absent:  Cochairman Representative Bill Stafford, Senator Jim Anderson, Senator Tex Boggs, Senator Steve Youngbauer, Representative Charles P. “Pat” Childers

8:30 am Meeting was called to order by Cochairman Hawks.  Minutes were approved as printed.  It was noted that a vote wasn’t taken on an amendment motion for draft bill 56.W2.  This will be dealt with by the legislative standing committee if the bill passes the introduction vote.

Presentation of House Bill No. HB0057 Tax Liens (Presented by Johnnie Burton – DOR and Vicci Colgan – AG)

Mr. Chairman, members of the committee we talked many times about liens and whether or not we had the proper statutes to take care of delinquent severance taxes.  We know that the liens statutes as they exist today are not adequate and we had proposed in 1999 a bill to try and take care of the issue.  In 1999 the bill was passed by the House with no amendment.  In the Senate Revenue Committee industry expressed some concern that they weren’t sure exactly what the bill was going to do and felt that we needed to look at it a little longer, so the bill was pulled and was not considered.  This bill we sent to you prior to today’s meeting is a copy of that 1999 bill.      Ms. Colgan, Chief Deputy Attorney General, will present and explain the bill.

VC:  Mr. Chairman, members of the committee thank you for allowing me to appear here.  I have a brief handout together with the bill which I understand you have already been provided.  Over the years when I represented DOR, it became clear then the lien statutes do not mesh with one another or even conflict one another.  They need to be totally revised.

 The basic concept of a tax lien of course is that the state can claim an interest in property for overdue taxes and then encumber that property and, if needed, sell the property and apply the proceeds towards the overdue tax liability.  The state represents the people and has to have revenues to continue providing services.  Consequently, many other states allow for an automatic operation and validity of tax liens without even the requisite filing of notice to any third party creditors that might exist.  This is not a typical debtor/creditor relationship where the parties have entered into a contract.  As a result, Courts have allowed taxing agencies more leeway than some other types of creditors.  On the other hand, other interested persons we believe should have notice at some time that the state has claimed an interest in property in which they may also be claiming an interest and they should have a fairly clear idea of whose claim is going to come first on the proceeds when and if the property is sold.  That really helps to alleviate problems both for the state and for the creditors, because in the end what you are looking for is clear title.  If you have to spend years litigating who has first claim to a certain piece of property you are not going to have any clear title and business cannot proceed.

There are several policy issues which any legislature must address when it’s talking about tax liens and collection of overdue taxes, such as: 

What is the priority of a tax lien?

What property does the lien attach to?

Does it attach to after acquired property?

Does it attach to future production?

Where should the lien be filed?

Does the lien cover penalty and interest as well as tax liability?

So, to address these questions and others, we have proposed a revision using essentially Wyoming case law and statutes from other jurisdictions that are mineral producing states such as Oklahoma, Colorado, California and Texas.  If it is okay with the committee I will go over that section by section now. 

Ms. Colgan went through an explanation of the bill.  Her written explanation was distributed to the committee.

The question-answer period revealed the following problems, questions or confusion that will need to be addressed:

Ø     Who are the mineral interest owners?

Ø     There may be a problem with the number in the bill as it relates to the existing statutes.

Ø     The burden would be on a third party to check all counties to discover a lien.

Ø     Could there be a centralized database where a third party could check for liens?

Ø     The lien continues until taxes are paid.

Ø     Penalties and interest continue to accrue until taxes are paid.

Ø     These liens are for severance taxes only.

Ø     DOR now has the authority to settle tax involved in legal disputes.  In the case of lien, there is no dispute on the tax liability.  Tax is simply delinquent and DOR has no authority to negotiate that tax liability and release a lien.

Ø     Would a lien apply to all property in the state even if taxes were paid on property in some counties and not in others?

To address some court decisions that came about since this bill was drafted, we have some amendments that would be included in a new draft.

DOR will come back next meeting and attempt to answer the questions and concerns expressed today.

Industry’s Input to proposed tax lien bill HB0057 (represented by Bob Ugland)

Mr. Chairman, members of the committee Bob Ugland with Petroleum Association of Wyoming (PAW).  I was quickly going through these amendments and trying to see if I could get some clarification to some questions that have come up from the oil and gas industry.  Maybe what I could do if it is alright with you Mr. Chairman is give you an idea of our thinking and maybe ask some questions for some clarification that I don’t think we have at this point in time.

Fairness and logic say that the person who did not pay the tax should be the person who gets hit with the lien.  But, it obviously becomes extremely more complicated when you look at the involvement of everyone from purchasers, to operators, contract operators, take-in-kind owners and others.  Then of course it is further complicated by the rules that specify that the only two parties who can remit taxes are the operator or take-in- kind owner.  So I guess these questions come up; if a purchaser collects tax from owners/payees but does not remit that money to the operator so that the operator can remit to the state, who’s property gets hit with the lien?  And if the operator collects taxes from interest owners or receives a remittance from a purchaser, but does not pay the taxes to the state, who gets the lien?  I think this was talked about, but I need more clarification; if interest owner A’s taxes are collected and paid by the operator to the state, but interest owner B is a take-in-kind owner and does not pay his taxes (B portion) does A get hit with a lien?  What is practical as far as how to file the liens?  Do you file a lien against any property owned by the delinquent taxpayer in that particular county or just the property on the related lease or unit?  Do you file a lien against all properties owned by the delinquent taxpayer in the state?  I think there does need to be from Industry’s perspective some continued clarification and reworking of this bill so that it is very clear to the taxpayer as to what the rules of the road are.  Mr. Chairman I thank you for the time to bring up those issues.

Sen. Hawks:  Bob, understand that the committee has been waiting for two years to hear from industry on this.  So as far as reworking or whatever, it’s our intent to proceed on this and not take it under advisement like we were asked to do two years ago by industry on this bill. 

DOR response to Industry’s questions (represented by Johnnie Burton – DOR & Vicci Colgan – AG)

The lien applies to the mineral estate from which the mineral was produced and to all property of the operator and interest owners in the state, as the bill is presently drafted.

Take-in-kind owner is the same as the working interest owner.  If a take-in-kind owner pays his taxes and a non take-in-kind remits to the operator who goes to Mexico with it, the lien still applies to the property and everybody has a stake in that property.  Do not confuse collection and lien.  Every owner is liable for the tax in proportion to their interest but the total property is subject to the lien. 

Sen. Hawks:  Industry would you like to respond to that?  Bob Ugland:  Are we talking about the owner or are we talking about the property itself?  Vicci Colgan:  Mr. Chairman, the basic concept is that there are two entities which are liable under Wyoming law for the severance tax, the severer and the working interest owner  (take-in-kind owner) to the extent of that interest.  The severer in essence is responsible say for all of the severance taxes from all of the mineral produced from the land, because he has exercised the privilege of severing it.  The working interest owner (take-in-kind or not) is liable to the extent of the amount which he has severed or which the operator has severed on his behalf.  That is what we mean about he is liable to the extent of his interest.  In other words, if the operator severs a 1000 MCF the operator is liable for severance tax on a 1000 MCF.  If there is a take-in-kind owner who takes 100 MCF and sells it on his own, he is liable for the 100 MCF not the 1000.  If there is a working interest owner who is entitled to 100 MCF, but the operator still severs and sells it for him the operator is still liable for the total 1000 MCF, and the working interest owner is liable for the 100 MCF.  It’s attributable to him because the operator severed it on his behalf.  So then the question is, when you need to collect the tax and you want to establish a lien against which property do you apply the lien?  In almost all instances that I know about when you owe a government money for taxes, for example you owe on your income tax, the government does not just apply the lien to your future income it applies the lien to every bit of property you own because the idea is you have a debt and you need to pay it off.  That is the same concept here.  We are talking about to which property should the lien attach?  And we are saying if you are the operator it attaches to any property you own in the State of Wyoming.  Now, that is a huge incentive for you to pay your taxes. 

Johnnie Burton:  The operator pays taxes on behalf of all the interest owners for whom he sells the product.  The take-in-kind person pays his own taxes.  So, you could have a scenario where a take-in-kind has paid his taxes, but the operator who is supposed to remit taxes for the other four working interest owners has collected the taxes from them, has deducted it from their interest check and does not remit it to the state.  I think the question you are asking is if we put a lien because the operator is delinquent would that lien also attach the property of the take-in-kind that is not delinquent?  Is that what you are asking?

Sen. Hawks:  And the reverse. I understand what you are saying, but lets say the operator collects from everybody and pays and the take-in-kind owner does not, then do you just go after just the take-in kind owner? 

Vicci Colgan:  Mr. Chairman, no, we go after the operator as well because under the law the operator is responsible for paying the severance taxes because he is the one who exercised the privledge of severing.  And he needs to go back against the take-in-kind owner. 

Sen. Hawks:  As a general comment, it seems to me that there is confusion.  I think we understand the intent of what you are trying to do, but we are saying that the lien applies to the property and to the operator.

Q.                I think that was the general statement you made?  A.  Mr. Chairman, the tax liability applies to the operator and to the working interest owner to the extent of his interest of the property.  That is the liability. 

Q.                Let’s say you have only one interest owner and he owns 10% can you go against him for the 100% of the lien?  A.  Mr. Chairman, you can only go against him for the 10%, but you tie up the whole property with a lien.  You can only collect from the take-in-kind interest owner the amount that he owes.  The lien applies to 100% of the property but the tax liability is only in proportion of the ownership share.

Q.                Can the operator during this time let’s say when that is being paid off; can the other owners sell their product?  Will somebody step up and buy it if there is a cloud on it?  Q.  The product or property Mr. Chairman?  Q.  The product?  A.  The product can be sold but the people that haven’t paid their taxes, their future production revenue is going to have to be docked in some way to pay for the old taxes. 

Q.        But they could still market the product?  A.  Yes.  There would be a cloud on the title of the mineral estate until all taxes are paid, but the product can be sold. 

Vicci Colgan:  I really think we need to avoid the trap of having industry say that it is so confusing that we just can’t do it.  The concept is if you are a working interest owner and you owe 10% of the taxes we can only collect from you 10% of the taxes, but to do that we can tie up all of your property. 

Johnnie Burton:  Mr. Chairman if you will allow me I will echo what Ms. Colgan just said.  We haven’t heard a word against this bill for two years.  Not even as of this morning and it’s difficult to answer legal questions and legal concepts and clear them all up off the cuff.  It would be nice if we had had a chance to see what the concerns were and address them.  I think you had a very valid concern on some of the language; we will come back with something to clarify that for you. 

Sen. Hawks:  I think we need to have a good written statement addressing these concerns and spelling it out in black in white. 

Johnnie Burton:  I think the general concept if I can summarize it is that the lien attaches to all the property, it ties it all up under a lien.  The product can still be sold and each interest owner is responsible for the taxes to match his interest, not for the whole thing.  But the whole property is tied up until all taxes have been paid. 

Vicci Colgan:  Mr. Chairman, what you need to keep straight is the concept that there are two people liable for severance tax; the severer and the working interest owner to the extent of his interest.  So, you are talking about how much you can collect from each person as one concept and from the operator you can collect it all.  From the working interest owner, if he only owns 10% of the production you can only collect on that 10%.  But the next concept is given that he owes you that 10%, you can tie up all of his property in the State of Wyoming until he pays it.

Q.                Mr. Chairman, if you are tying up all the property what happens to the payments?  Do they go into escrow?  A.  Mr. Chairman, we have today the ability and the authority to ask the purchaser to remit the tax money to the department before he disburses the revenue to his interest owners or seller.

Q.                I am referring to those interest owners that as I understood you said, their percentage had been paid?  A.  Right.  Mr. Chairman, this is something that we have to administratively work out with the purchaser.  We tell the purchaser what tax is owed on which percentages and he remits that directly to the department. 

County’s Input to proposed tax lien bill HB0057 (represented by Joe Evans - WCCA)

Mr. Chairman, Joe Evans with the Wyoming County Commissioners Association.  We don’t have any problems with what is in this bill.  It doesn’t affect county directly anyway.  But as you can imagine the counties have the same problems with ad valorem on occasions that the state has with severance taxes.  What county would like to do is to use this language as appropriate for the counties and there may have to be some changes made and present some similar language for the ad valorem taxes which the counties collect and bring that forward when you work the bill the next time.

Public Comments to proposed tax lien bill HB0057

Mr. Chairman, members of the committee I am Sarah Gorin from Equality State Policy I just wanted to raise that point with regards to mortgages.  If you are a homeowner and you pay your taxes and escrow to a mortgage company and the mortgage company doesn’t pay you are still liable.  So, while it sounds like there is some clarifying language needed here to determine the extent of the person’s liability I think we should be cautious not to put the state in the position of resolving prior disputes.  If working interest owners put their faith in an operator who turns out to be untrustworthy that is not the state’s problem.

Committee’s Discussion on proposed tax lien bill HB0057

Sen. Hawks:  Committee I think it would be helpful if we asked the department and the AG to come back giving us a side-by-side look at this bill.  In other words, take each paragraph and give us a description of what it does and does not do and then come back with the things that we addressed today and bring that back then in the bill along with the comments.  I would like to be able to look at each one and say okay this is really what this paragraph tells me.  Would that be doable? 

Mr. Chairman I do believe it would.  I would like to point out one clarification.  When we talk about the extent of the interest owners interest and who is liable for what, the statutes which provides the imposition of the tax which is 39-14-103 subsection (c) defines the taxpayer in subparagraph (iii) as any person extracting valuable products subject to this chapter and any person owning an interest in the valuable products to the extent of their interest ownership are liable for the payments of severance taxes imposed by this article.  So that makes it clear that if you are an interest owner and say you own 10% of the production you are only liable for severance taxes on that 10% of the production. We will put this in the liens section as well to make it clear.

Q.        Are we asking to have a draft of the ad valorem that was suggested earlier?  A.  Mr. Chairman, I have already made notes to that and we will look into it.

Sen. Hawks, my intent was that everything that was addressed here today would either be in the bill or in comment at the next meeting.

Q.                 At our last meeting when we decided to sponsor Netback, do you see any relation with that action and this one as regards if there is going to be any value to the tax where severance tax would be applied?   A.  Mr. Chairman there is a floor in that bill.  If it stays that way there will always be a value.  So taxes will be owed on that value.  If they are not paid then a lien could be applied to that property just the same. 

Q.        Mr. Chairman, are we clear that the state’s grab on the coal bed methane operator only applies to the gas and not to the coal being produced?  A.  Mr. Chairman, that’s the intent and if we need to clarify this further we will in the proposed amendment that we will bring you.  It applies to the deposit that was produced, which is gas in this case.  We will have the AG give us an opinion on how that should work and we will go from there. 

Sen. Peck:  Mr. Chairman I think it is important that we move forward with the bill to make it possible for the entrepreneur to attack a defunct property which is left in that state because of delinquent taxes.

It was decided that DOR, Industry and County would address issues discussed and present a re-draft of HB0057 at the next select committee meeting.  At the next meeting the intent is for the committee to hear the amended proposal, discuss and take a vote to sponsor bill as a committee bill.

State/County Tax Relationship (presented by Johnnie Burton – DOR)

Mr. Chairman, what we need to talk about is really the mineral taxation system as it exists in Wyoming today.  I think the fact that the county and the state have had some differences of opinion in the last few years, and that this has become more visible and more pointed, tells us that the way the system is set up may need revising.  If I try to define the problem in one sentence I would say the problem is who’s in charge of what function?  Litigation is costly and we have had plenty of it in the last few years.  But what is maybe even more important than the cost of litigation is the fact that finality of taxation is really difficult to reach today.  It seems to occur only when we go all the way to the Supreme Court.  The Supreme Court can then send the matter back to the board or to the department and that will mean we can go again to the Supreme Court and we have a vicious cycle with justices deciding on taxation policy for the state.  The legislature is supposed to decide on taxation policy and I think the way the system is set up today the legislative body is losing control of the taxation issues.

Mrs. Burton then went through a historical perspective of the tax system.  She went through the problems the system fosters and proposed a menu of solutions.  Her written comments and proposal were given to the committee. 

In summary form, the possible solutions proposed are as follows:

1).        Make the county no longer able to appeal final decisions of the DOR to the SBOE.  The state determines value for both severance and ad valorem.  The counties use that value to levy property taxes.

2).            Separate the two taxes (severance tax and ad valorem) and give the county the full authority to do mineral valuation for their ad valorem tax.  The state would continue to do severance tax and the counties would do ad valorem.  The SBOE function is equalization of taxes.  SBOE would verify if the counties are uniformed or not on how they value their minerals.  That would be another solution.

3).        The legislature establishes only one tax on minerals.  You either separate the two taxes completely or else you put them together in one tax.  This might involve a constitutional amendment.  DOR could administer it.  The legislature would have to come up with a formula to distribute that money back to the counties and the state.

These are big issues Mr. Chairman.  They are the crux of what we do in the state in terms of taxation and providing services to the citizens, very important issues. 

Now, barring implementation of any of those options we could propose tinkering if you will with what exists today to some extent.  What we would propose is that county should be limited in the scope of their appeal and the request of information if they are going to keep their right of appeal to the board.  Their right of appeal should be limited to valuation arising strictly from audit findings, because that’s a final determination.  Those are truly numbers that the state has verified.  I think filing an appeal at this juncture, meaning after audit findings and assessment have been done is the proper time to file an appeal and not on an everyday notice of valuation and amendments.  That is premature. 

In addition, when counties do appeal from assessment resulting from audit they ought to be limited in the scope of what they can appeal.  For example, if the department has valued the mineral using one of the statutorily permitted methods of valuation then the county should not try, on appeal, to change that method.  Their appeal should be limited to the correctness of the implementation of the method.  Did the department apply the method correctly or did they not?  Is there anything that tells you that maybe they didn’t do it right?  Then counties can appeal that.  The same applies to the scope of discovery from the DOA.  The Department of Revenue has to make the decision regarding method on the front end.  But once we make that decision the county should not be coming back four years down the road and saying we don’t like this method we want data that will support another method.  They are redoing the whole thing four years after the fact.  So, we think there ought to be some parameters and some limiters.

 In the settlement mode the state should retain the authority to settle and change taxable value and county should not have the right to appeal that because the legislature has given the department the authority to settle.  However, the state should be statutorily mandated to communicate with the counties before they sign any settlement.  They ought to meet and consult with the counties to fully explain the reasons and the terms of the potential settlement, in other words, consultation with the counties before final decision.  But the counties should not be allowed to appeal the settlement or the corrected taxable value because they have been privy to all internal discussions regarding the settlement.

Mr. Chairman I think these are very important issues and we are asking you to review the total scheme of taxation.  Maybe it is time for a sea change in Wyoming.  We have a constitution that demands that we do things a bit differently than other states, maybe you want to go all the way there and change some of the Constitution provisions.  Maybe you don’t want to go that far and see what you can do legislatively to try and smooth out the system, but I think that we need to think about that very carefully and maybe use whatever time you have left in this committee to do something that has really been needed for quite some time now. 

Q.                Could you give us a little further elucidation on the extent of the appeals, the success of the appeals and whether that has diminished compared to what it was two years ago?  A.  Mr. Chairman, some kinds of appeal have diminished.  We seem to have actually less maybe on some valuation issues because of some Supreme Court decisions that clarified what we need to do, what’s taxable, what’s not, so that is helpful.  We have definitely an increase in county appeals.  They may not look like a lot as compared to the whole docket. However, as of the last time I looked DOR has some twenty appeals from one county alone.  I just received a couple of weeks ago another one from another county where the attorney states extremely clearly: “we don’t think we have a problem with this certification because it is an increase in value; however, we haven’t had a chance to review all the documents and make up our own mind so, we appeal.”  DOR is supposed to be setting valuation.  DOA is supposed to verify and if new valuation is found, it is certified to the county.  Why is the county, through the appeal, asking to re-do the work of two agencies?

Q.        From the county’s perspective is there one-ups man ship to appealing before the audit?  Why are they doing it?  A.  I don’t know Mr. Chairman I guess the counties can answer that.  I have to tell you though it is not all counties that appeal.  Strangely enough we never hear from Campbell County, it’s rare.  When we have a dispute with Campbell County there is really an issue that they have focused on and that is fine.  It is primarily the southwest corner of the state that seems to be very active in appealing with no specific complaint, other than wanting to review our work papers.  

Q.                Mrs. Burton does this have to do with a particular type of mineral more so than another?  A.  We are looking at oil and gas both more so than coal or any other mineral.

Q.                Mrs. Burton you mentioned the Supreme Court was making tax policy as regard to valuation of minerals.  What is happening when they give an order?  Does that come back to legislature to enact their directive in the form of statute or does that become law in its own right and legislature is out of it?  A.  Mr. Chairman, it becomes law in its own right and we follow it unless the legislature decides to come and pass a different law.  Then from that point forward it would change.  I have brought back some issues to the legislature when the court has essentially changed what DOR was doing.  Then you have had a chance to change the law prospectively. 

Q.        Do you have a number of mineral cases before the SBOE and those that have been appealed onto the court system?  A.  Mr. Chairman, I do not know, but I think I can get you those numbers.  I can talk to the board and they will share that information. 

Sen. Hawks:  I do believe as we move forward with this I think it is important that we have the number of appeals and the size. What are we talking about in dollars and numbers both?  A.  Mr. Chairman, we will try to find out, but you need to remember that even if it is one case, and the board decides on it, then we are bound by it.  If the bill you chose to sponsor (Netback) moves forward and is passed it will get rid of Proportionate Profit, but it still exists today and unless the bill passes it will remain an issue.  If you recall last time when we met in Casper I had mentioned that the DOR had a difference of opinion with the county on how the formula was supposed to be applied and the board Friday ruled against DOR and for the counties.  Now, if Proportionate Profits stays from now on we will apply the formula the way the board decided it should be applied.  The big question now is “do taxpayers have to re-file all past years and change the way they have applied the formula?”  We do not know yet.  So, to answer your question the number of appeals or the volume of dollars is secondary to the issue and how it is decided.  Because once a court decides on one appeal, it becomes DOR’s guideline for all taxpayers.

Q.                How does the state value mineral property for ad valorem purposes?  A.  Mr. Chairman, it’s fair market value.  The taxpayers tell us what they received for their product minus whatever allowable deductions.  That sets market value and the value for severance tax has to be the same as the value for ad valorem.  This is one of the reasons I have been very non-plused by the discord between county and state because we have the same interest.  If the county thinks we are not valuing it right for them, we are not valuing it right for the state either.  Severance and ad valorem taxable values have to be the same.

Q.                Is this based on a certain amount of production?  A.  This is based on what is sold within a calendar year. 

Q.        For clarification, you say, you follow the board rule?  A.  DOR will follow the decision of the SBOE.  Now, if the taxpayer appeals it to the courts we may have to change again what we’re doing if the courts overturn the Board is order.

Q.                Do they all go directly to the Supreme Court?  A.  Mr. Chairman, for all practical purposes they do, very few of them stop at the District Court.  They file with the District Court but very often the District Court won’t even touch it, they just pass it on to the Supreme Court.

Q.                Did you tell us what the issue at hand was in the case you just lost at the SBOE?  A.  Yes sir. If you recall, the Proportionate Profit method takes the gross revenue that the company received then all the taxes and royalties are subtracted.  Then a ratio is calculated between all direct producing costs versus total costs of producing and processing.  That ratio determines the allocation of costs to production.  100% of taxes and royalties are then added back to determine total taxable value.   The department contends that taxes should not be included in the calculation of the ratio.  This will skew the allocation.  We do not deny that taxes are part of the taxable value, that’s why 100% of taxes and non-exempt royalties are included at the end, but they should not also be in the ratio.  The coal statute is very clear that you don’t include taxes in the calculation of the ratio.  The oil and gas statute is silent unfortunately.  It just says direct cost of production.  So the counties are saying taxes are a production cost, you must have them in the ratio regardless of what the rest of the formula does.  The SBOE agreed with the counties because the statute is silent, regardless of the mathematical inequity.  The companies have used the formula ever since Proportionate Profit was put into Title 39 by not putting taxes in the ratio calculation.  Looking at the formula I thought that it made no sense to have taxes in the ratio because it was in fact allocating to something that generates no profit and because we have 100% of tax value anyway.  When asked by DOA in 1996, I wrote a memo saying we will accept it the way the companies have been filing it and that will become our policy.  That is what the counties appealed and the board ruled in favor of the counties.  The gist of the decision is the statute doesn’t say you take taxes and royalties out of the ratio calculation therefore you put them in.  So that is the way it has to be done. 

Q.                When industry is in a state which controls such an enormous percentage of the total production nationally of a particular mineral would a change to a one tax system on minerals open the door to producers being able to control things (prices) to such a degree that it increases the likelihood of a significant detriment to this state?  Is that a possibility?  A.  Mr. Chairman, I really don’t think so because you are going to tax them the same amount whether it’s one tax or two.  If you were going to make it one tax you would change the rate so that you would collect the same amount of revenue; there would be no real advantage to industry other than administrative advantage.  Mr. Chairman, Wyoming is not the only state that would have one tax.  Several of them do today.  In fact, we are kind of the odd balls for having two different taxes administered by the state. 

Q.        Mrs. Burton, are you going to recommend one of these three options to us or are you going to leave that up to our deliberations?  A.  Mr. Chairman, I think recommending something on the front end might bias your way of thinking and I would rather you just look at it and see what you can come up with as far as advantages and disadvantages to each one of those solutions.

County’s Input to County/State Tax Relationship (represented by Joe Evans – WCCA)

Mr. Chairman my name is Joe Evans I am the Director of the County Commissioners Association. With me is Randy Fetterolf, Mineral Auditor for the State of Wyoming, and now for the counties.  This situation that Mrs. Burton has talked about is as difficult for the counties as it is for the state I can assure you.  I think the very first thing that Mrs. Burton talked about that these relationships are based on the system.  I think the issues that this committee has been addressing the last several meetings, the methods of valuation and making the valuation process simpler  (you are talking about natural gas) is the single best thing you can do to solve many of these problems.  The reason counties have problems with the state is because of the valuation method and its complexity. 

I want to go over the other areas the counties are concerned about and then talk about specifically some of the areas that Mrs. Burton mentioned.  When we started this process almost a year ago, the counties had three areas of concern:

1).            Valuation reporting.  Of course the valuation reporting I think you are making great progresses on and the outcome at the last committee meeting will help a lot to solve these problems. The take-in-kind reporting system should be abolished.  It’s the one that is causing most of the problems with the SBOE.  It needs either to be amended or abolished because it’s not providing information that is necessary for the counties or for the state right now.

2).        The collection and distribution is still a problem.  The state collects its severance tax on a monthly basis; the counties collect their money up to two years after production.  At the county level you have twenty or thirty working interest owners to go after two years after the fact and they may or may not be around.  We think that going to a monthly collection system for ad valorem is something that needs to be discussed at length by the committee.

3).        The county participation.  We are hoping we could take care of some of the problems on the front end (the valuation system) and this would solve many of the problems at the participation level.  Let me talk about participation and why we think it’s critically important.

Right now as you know we can appeal the notice of valuation change that the DOR issues, to the SBOE.  Counties feel they should have that right to do so because there are critical amounts of money that the counties need and are involved with.  Notice of valuation changes can run an extremely high percent of a county’s budget or the local school districts or the special districts that that money goes to.  In some cases a single taxpayer can make a change in their assessed value that can cost millions of dollars several years after the fact that the counties are then responsible for getting back to that taxpayer.  That is why the counties appeal these on a regular basis. 

So when the county goes before the SBOE and protests, if the county wins that is well and good for the county but then the taxpayer can appeal that to the courts which of course is their right and should be.  If the taxpayer wins the county doesn’t have that same opportunity.  The county is out of the system.  I know personally all the members of the SBOE.  I think they do a good job and are honest people, but it would seem to me that if you have someone sitting in that position and they know that if they find in favor of the county the industry is going to appeal, but if they find in favor of the industry, no more appeal.  The fact that they can stop at that process if they find in favor of the industry is another reason why the counties need to have the ability to appeal the SBOE decisions.  It’s not equal justice now.  I truly believe the counties are not in there to be the ones who set the value.  That is the DOR’s job and should remain their job.  We believe we should be involved in the process.  County would suggest some type of process in the statute, regulation; whatever would be appropriate that defines just how the county can be involved.  The access to mineral audits has been discussed many times by the legislature.  Without that information when you do question the values that have been set without the proper information available from the mineral audits it’s almost impossible to do.  We continue to believe that counties as tax collectors need that information to make sure those taxes are collected.  If I were with the DOR I wouldn’t want twenty-three counties looking over my shoulder on how I am doing my job, but the fact is that in government that is how our entire system is set up.  You have checks and balances.  I think it is good to have those checks and balances.  We have commissioners who have a tremendous amount of expertise in the coal industry.  Thirty years of experience in the oil and gas industry.  I think not to include those individuals and let them have a say and some input in how you are valuing the minerals in their county is a mistake.  Not only do they have expertise they are elected officials of the county and have judiciary responsibilities to see that the taxes are collected properly. 

I do want to respond to some of these solutions that were suggested because I’m not against any of them per se, just as we are not for any of them per se.  I think the idea to think about these for a while is a good idea.

 If the counties are no longer able to appeal to the SBOE, but can use the investigative power of the Board, I will let Randy Fetterolf talk about that in more detail because the investigative process of the SBOE is something I have no expertise in.

To separate the two taxes and have the county do the valuation I think that defeats the whole purpose of all the work this committee has been doing in the last year making a valuation process that is uniform.  It makes sense to me that if you can set the valuation of product for severance taxes and then use that for ad valorem that is the simplest way to do it.  To have twenty-three counties value that same property that the state has already set a value for, think of the cost of the taxpayer when he has to start paying for the auditors and everyone else that each county is going to then have to hire.    On the other hand it does take away as indicated the problem we have with our differences.  If we do our own we no longer have to have that fight.  So there is the upside to that obviously. 

The one tax issue also solves some of the problems. But there are two parts of that I would have concern with:  1). If you are a coal mine in Lincoln County right now, because of the lower mill levy than say the neighboring county of Sweetwater you are going to have value that is going to change for those coal mines.  Let’s say the mill levy is 78 in one and 75 in the other.  If the state starts assessing those coal mines and bring the money into the state then redistribute to the counties there is going to have to be one tax rate on those coal mines.  Right now they are different as appropriate in each county and I’m not sure how much the taxpayer would like to pay an increased rate and I’m not sure you should be collecting any less if it went down.  2).  Once the money goes to the state there would be a lot of concern in the county as to what happened to that money.  Right now it goes to the county and the county disburses to the local entities and there is no question where it goes.  Once it went to the state I am sure most counties would be concerned, especially in years where we didn’t have surpluses as we do now of just how much money might be siphoned off to go somewhere else.  I think that is a concern that maybe isn’t a very big concern today, but had been in the past.  The whole earmarking issue brings that possibility to the forefront for the county.  Although it would solve a lot of problems in one area, it would raise problems in another area. 

Q.                 Joe, I have a question that I asked Johnnie and that is: why do the counties so consistently appeal before audit?  A.  Mr. Chairman, I will let Randy address that somewhat because he does some of the appeals, but I think partially it’s because of the money.  If you have a two million dollar NOVC and that money has to come out of the county and there are other local entities to pay back you need to question that and you only have a thirty day window to do it.  The best thing the county can do to the timeframes involved and the amount of information that actually isn’t there is to file the appeal and worry about getting the information later, because if you don’t file the appeal you are done.  Perhaps Randy can give you a little more detail.  Randy:  Mr. Chairman I would like to add to that answer and say the real short answer is the county is trying to preserve its rights.  It receives an NOVC for a giant refund it really has no idea what is behind it and it is suspect typically of what is behind it.  It is not an audit or some action by the state, but some amended tax return submitted by some taxpayers that essentially by some self-reporting system is then changing the taxable via those amendments.  The counties if they do not appeal the NOVC within thirty days are out of the game no matter what happens.  If the taxpayer appeals the NOVC and there is a proceeding at the SBOE the county can come in as an intervener and can be an equal player in the process.  But when the taxpayer is sending an amended return involving a complicated valuation formula like Proportionate Profits and says for the last three years we have over reported, over stated our tax basis, we would like a refund of ad valorem taxes based on our own say so, most of the counties I work for are inclined to say well do we appeal this now, do we wait and see if the state appeals it, we doubt the taxpayer will its their amended return.  We’ve got one shot and if we don’t take it now we lose our rights and we have no standing to question it later.  Now that is what has happened with Sublette County and many of the others Mrs. Burton has mentioned.  County treasurer or assessor gets an NOVC it says refund two million dollars to taxpayer “A” based on their amended returns or even based on an audit from the department or the third case which she discussed is a great concern with the counties is a settlement.  This NOVC is a result of a settlement of the valuation for taxes between the state and the taxpayer please refund accordingly or please collect additional taxes from the taxpayer.  Again, county treasurer or assessor comes to the commissioners and says well boy there goes the budget.  I’ve got 2.8 million dollars I’ve got to refund to this taxpayer for something that happened five years ago or for some amended returns submitted by them that have not been audited and undergo a very low level of scrutiny at the DOR, almost none as Mrs. Burton pointed out.  It does get audited four years from now or maybe it doesn’t if it doesn’t meet the DOA risk analysis for auditing.  They have limited resources.  It may never be examined; it may never be looked at.  The decision of the board on Friday is a real good example of why the counties pressed for and finally got the right to appeal in 1995 from the legislature.  You have heard me layout the county’s position in that one.  It’s where the county came in and said we don’t believe the state did this right.  We believe that the state made an error in interpreting the law and we believe the state applied that incorrectly.  In this particular instance the addition and adding back of royalties and taxes as direct costs into the proportionate profit formula for the last five years is a substantial and significant amount of tax dollars at issue.  To take away the counties ability to appeal, well we would say pretty strongly what happened last Friday is the singular reason not to do that.  The county should have a right to appeal.  We want more rights, more standing, not less.  Mrs. Burton said in the event you took away the counties right to appeal; they would still have the ability to ask the board to look at an assessment or look at valuation.  That is fine and of course typically the board will say yes.  But what the board does to the counties in those instances is they put the burden of proof on the county. That burden of proof is very tough.  Essentially what the board ends up saying to the county is what are your reasons for your view.  What is your reason for feeling that a mistake was made here?  The counties are at a loss to immediately provide that information other than a gut feeling.  That burden of proof is very tough.  The county doesn’t want to lose its right.  The county is asking legislature to give us more rights. 

To limit the counties right to appeal until after audit or limit the scope of what can be appealed or limit the counties discovery rights, to us sounds like unfairness.  Now the county either is or isn’t a bona fide equal partner in this litigation, equal entry into the litigation.  If we are allowed into the litigation then we shouldn’t have any restrictions on our ability to discover facts or to proceed with our case.  That leaves the second option in my view anyway as the only viable possible solution that I think the counties would want to consider.  There are others, but the separate tax idea on its face is not bad.  Industry has said often counties you should have your own tax.  You should administer, isn’t that what you really want?  Given the three possible solutions presented by Mrs. Burton at least in my view that second one is the best of the three. 

Q.                 Do the counties not have a right to appeal a final valuation?  A.  The counties cannot appeal a decision of the SBOE to District Court.  The county can appeal an NOVC or an NOVC that comes after an audit of the same property that was initially an NOVC resulting from the company’s amendments. 

Q.                On your NOVC I was under the impression that this is normally of numbers rather than a methodology?  A.  It is a change in numbers and it does instruct the county to either add to the tax roll or reduce, but it can emanate from a dispute or a settlement of valuation method or an audit of a valuation method.

Q.                Change in numbers would come before audits wouldn’t they?  A.  They can come from amended returns submitted by the taxpayer that will await an audit.  Taxpayer can say I want to change my original reporting.  I would like to reduce the value I reported.  It can come from an audit that has been done.  It can come from the department and taxpayer’s settlement of an issue raised in audit.

Q.                On NOVC’s and the possible changes in dollars I understand county’s concern with their budgets.  If there was a fund or some method that helped the counties would that make a difference in appeals?  A.  Mr. Chairman, I think that would depend.  If the issue was strictly the dollar amount because of the amount compared to the size of the county’s budget that might make a difference.

Q.                Will you still have the same problems with the NOVC’s if you go to a monthly ad valorem system?  A.  Mr. Chairman, Rep. Hines, yes, the problem wouldn’t change if it stems from the valuation process.  Where I think it would help the process is when the county was looking to collect ad valorem tax.  It is more the collection of the tax itself, not determining the value.  It won’t help the valuation picture.

Q.        You mention the counties want to be included more in the process.  I don’t think I understand personally what the counties mean?  A.  Mr. Chairman, Rep. Hines counties would like to participate in the events that transpire prior to the issues of an NOVC.  It’s difficult but if there is a large set of amended returns and a taxpayer is coming in and will cause a refund of ad valorem taxes around two to five million dollars the department gets those returns.  The county’s view is that this is the point at which they would like to be at least notified and have disclosure to them about the possibility that the state will issue an NOVC based on these amended returns.  Another instance is when the DOA closes an audit.  Many of these appeals are not just the case of the county disagreeing with the DOR.  The counties have come forward and suggested that audits were done improperly.  The counties have identified errors made in audits when they have been able to see those audits.  Most importantly is when a settlement is going to be made for back taxes.  The counties are just as firm in their belief of the expediency of settling something as the state.  Bring the county in and settle both together.  It has happened.  Mrs. Burton has done this on many occasions.  Mrs. Burton has invited the counties in and said we are about to settle this thing with taxpayer “A”.  Come on in let’s do this together.  When she has done that for the most part it’s worked well.  The DOR can ask the county to come in now and on some occasion does.  What I’m concerned about and I think the counties are concerned about is, it should not be at the discretion of simply the DOR if they want to do that.  It would seem to me that that should be a process that is a statute or regulation that says this is when you can do it county and this is when you can’t.  Whether you’re in Campbell County and a gas processor or Sublette County you are going to know the process is going to be the same and it’s not at the discretion of the DOR. 

DOR’s Response to County’s Input on County/State Tax Relationship (represented by Johnnie Burton - DOR)

I don’t have a whole lot to say Mr. Chairman but I will agree with Joe Evans that simplification will solve a lot of the problem.  I doubt we can get to the point where it will be real simple like a unit tax for example.  I still think we are going to need to look at the full taxation system. 

The areas of concerns of the counties I do understand, but I guess my issue is, “who’s in charge?”  The counties talk about being partners with the state.  I think it is going to be extremely difficult.  I heard Randy Fetterolf talk about wanting the county to have a chance to look at all the NOVC’s before they are issued.  I can understand that on audit, maybe I can understand that on settlement, absolutely.  I think the state needs to work with the counties when it comes to settlement.  I can’t understand it on what I call the regular NOVC which is the bulk of the NOVCs.  We are looking at probably anywhere from 2,500 to 3,000 NOVCs that we issue based on amendments.  I can’t imagine how DOR can pull the county in for each one of them before we can make a decision.  Especially when there is not a whole lot of decision to be made.  You get the report; if it tallies you use it until audit.  Now when we talk about the audit, I think I have a problem with saying well the county must be part of it.  The county certainly receives information that will tell it the audit findings.  If they want more information I think we can do that.  In fact, they kept talking about refunds of two to five million dollars, that hasn’t happened for years Mr. Chairman.  We don’t see many of those refunds anymore.  The system has gotten to the point where you don’t see too many of those huge swings.

Q.  What would be an average?  A.  You have to be careful what you are talking about.  Taxable value can be two to three million dollars or more.  But you apply six or seven percent tax on it and that is not quite the same number.  You might be dealing with anywhere from a one hundred dollar difference to maybe two, three hundred thousand dollar difference.  Now, this is not always a refund.  In fact, there are few of those because remember they pay their tax once a year.  So you don’t do it instantly you carry it through and it keeps netting out.  Now two years ago we looked at all the NOVCs for several years and we tried to see what they did to county funds, generally speaking.  When you get to the end of the year and you tally the increases or decreases of taxation we had never, never seen a year where the net number was a negative.  In other words, what we certify to the state in aggregate always amounts to more value, not less.  It is true that county-by-county you may have less value for a given county.  But remember you need to level that cost over a whole year.  Although there have been cases where the taxpayer was owed a refund, the taxpayer at that point made some arrangements with the county to be paid back over a period of time, or get credit on future taxes.  A lot of the counties give credit on the following year of tax so that they can deal with it and they don’t have to bust their budget. 

The other thing is, Mr. Chairman, we need to remember that when you get an NOVC as a result of an audit it’s very seldom a decrease.  Most of the time industry has to pay more because we’ve found deductions that the audit department disallowed.  That increase is additional money that was never budgeted.  It was never taken into account in the budget because they didn’t know it was there.  I think that Rep. Hines mentioned a separate fund.  Let’s say for any given year a county assesses an additional two hundred thousand dollars taxes as a result of an audit.  That money was not budgeted in the current year.  They don’t know what will happen in the future.  Since that money has not been factored into anything, that money should be put into some kind of suspense account where the county builds a reserve.  If there are times when they do have to refund they will have this reserve.  I know there is a concern with that because the money should go to school districts.  But if it is established by the legislature then you have a different mechanism to protect the counties.  I think that is a very valid point that they should have some kind of protection when they have to issue a refund, a way to level their revenue.   

I heard two different messages this morning from Mr. Evans and Mr. Fetterolf.  I think Mr. Fetterolf indicated that he might like the idea of the counties doing their own valuation and I think I heard Joe say he didn’t like it.  So, we will have to decide which it is before we can deal with it I suppose.

As far as preserving an appeals right, Mr. Geesey  (DOA) is here and might tell you whom they audit generally speaking.  I don’t know if I am speaking out school if I say that probably the top 30, 40, 50 taxpayers in the state are audited and at least 20 of them are audited for every year of production.  These are the people that may cause problem, meaning that they are the big producers, big money.  They are the ones that would cause the swing one way or another.  If the county would not appeal a routine amended NOVC for these folks they will have a chance to appeal it again if they decide it needs appealing when the audit comes in.  They can appeal the audit findings but should not open new issues, such as method of valuation.  In other words, the DOA would have verified those amendments.  This is why I keep thinking for the counties to have the ability to appeal audit findings I think might be a reasonable solution but not to appeal everything before it is audited.  Q.  Johnnie why do we have so many NOVCs?  A.  Mr. Chairman, I have asked that question several times.  The only folks that can answer that, is industry.  I get various answers.  Generally speaking they tell you that it has to do with how they market their product, how the purchaser reports back to them because there is commingling of gas for example, how much is allocated to one rather than the other.  Balancing, when they finally balance between owners, they find out that the reporting was really an estimate most of the time.  There have been corrections on prices, I don’t know why but they tell us that they reported a price and then find out that in fact for that particular gas or oil they received another price.  A lot of the amendments have to do with take-in-kind.  When Joe tells you take-in-kind is something they wanted to do away with I understand it.  DOR would love to do away with it too if they could.  As you know, one or more of the interest owners decide to take their product in kind and sell it themselves.  The operator just can’t report value to us because he doesn’t know what that person received.  It could be that the take-in-kind owner received a better price than what the operator received for the rest of the product or vice versa.  So, to know market value, we have to have the take-in-kind owner report.  Well, they do and they report that they have taken “x” number of MCF and then the operator reports what the total production was, we have to tally all the reports and make sure that it matches what the operator told us the well produced.  Very often it’s out of balance, so at that point we go back to all of them and say somebody gave us the wrong number, fix it.  Operator and take-in-kind owner have to reconcile their difference.  We give them a certain amount of time.  If they have not responded by the deadline, we’ll assess the higher volume reported.  That is when we have another appeal because somebody we assessed says well I never did take that much.  That causes a lot of trouble, because each time that means a new NOVC to the county.  If we assess somebody for a certain amount, we send an NOVC to the county, they get a number, and then we get a reconciliation and the numbers change, we have to send another NOVC decreasing this taxpayer and another NOVC increasing somebody else.  It’s a nightmare. 

Q.        Could you require for tax purpose say that the operator report it?  A.  Mr. Chairman we would love to do that and we have talked about it.  But, operators do report total production; they cannot report sales value because they do not know what the take in kind owner received.  If we assign a value, based on comparables, someone will appeal, stating it does not match what they received.

Q.        You would have to require the take-in-kind operator to furnish the operator?  A.  Basically, Mr. Chairman that’s what’s happening today, except instead of furnishing it to the operator they are furnishing it directly to us.  It still doesn’t match.  We thought of another way to do it is have the purchaser report.  This would solve one problem and create another.  Today the way you have the stream of gas being marketed to so many different entities, you may have five purchasers.  Then we have to do the reconciliation again.  I don’t know what the solution is, I agree with Joe we don’t want it, but what else can we do? 

Industry’s Comments to County/State Tax Relationship (represented by Bob Ugland - PAW)

Mr. Chairman, again Bob Ugland with PAW.  The oil and gas industry believes that Mrs. Burton has put before you a menu of items that we think is a good beginning direction to take a look at the different opportunities there.  We support the good work that she has done as far as bringing this to your attention.  So we ask, as you are going through your discussions and getting through the decision process, that you continue to look at alleviating the duplication of effort and streamline the process at the same time keeping in mind that currently we have checks and balances in place.  We have a DOR and we have a DOA. 

Sen. Hawks:  Bob I would suggest that both you and Joe perhaps reduce your comments to writing for the committee as we move through this.  I think it would be helpful to have something to refer back to as we might have one more meeting on this issue. 

Johnnie Burton:  Mr. Chairman from what I heard here today and what I have been hearing for the last five or six years, the reason the counties feel uncomfortable with this system, boils down to a question of trust.  Do they trust the DOR and the DOA to do their job and do it right?  The answer is obviously no; otherwise they wouldn’t be here asking precisely to oversee what has been happening with those products.  They call it check and balancing.  So, I have a question for the county.  Do they let the school district come and oversee their valuation of property and collection of taxes?  Because basically the system is the same at that other level.   The counties value, assess, levy, and distribute the money, all ad valorem money not just mineral.  As we know the school districts are the huge beneficiaries of that money, so I could say they have a vested interest in seeing that the counties are doing their job in valuation of other real property and yet I don’t hear that.  So, that tells me that the districts and the recipients of the money at the county level trust the county to do their job right.  Why can’t we get that trust on the other end?

Public Comments to County/State Tax Relationship

Mr. Chairman, members of the committee I am Sarah Gorin with the Equality State Policy Center.  It seemed to me that today’s discussion fell into two areas; one being philosophical issues and one called reality.  The philosophical issues are that counties are political subdivisions of the state and so it’s not desirable to have the counties fighting with the state.  They should be acting as a unit.  Another philosophical point is that the mineral revenues are not entirely the concern of the counties that have mineral production.  Under our current distributions mineral moneys go to all counties.  The really big gorilla in the room is education funding where the courts have told the legislature: you need to find statewide funding for a statewide purpose.  So when we think about county participation in the valuation process it needs to be thought of as a bigger thing than just the counties that are actually producing the minerals.

Now the reality of the situation is that although counties are political subdivisions of the state and therefore, should be acting as their arm we are telling them on one hand you need to do x, y and z like set your mill levy, set your budget, do this, do that, provide these services while at the same time saying we are not going to show you how we got the money that you are supposed to do these things with.  That’s the counties’ complaint.  It has been mentioned that some counties are particularly trigger happy about lawsuits.  It’s also true that certain taxpayers routinely appeal, battle and fight.  I think you will find that there is a relationship between these two entities and that the counties that have the most activity going to the SBOE and to the courts have also been badly burned by the activity of certain taxpayers.  So they feed into each other.  We need checks and balances in the system and the counties have historically provided a great deal of accountability.  Probably their most outstanding effort in recent times has been the hiring of the so-called bounty hunters.  Because the DOR at that time was not performing even the simple exercise of checking to see if the taxpayer reported the same production numbers to the oil and gas commission that they reported to DOR.  Lo and behold it turned out that they weren’t.  Now industry needs policing.  The state wasn’t doing its job.  Now that was under a different administration and the DOR is now performing those reconciliations as a matter of routine.  But that wasn’t always the case and the counties were instrumental in making that change.  That contributes to what you mentioned just a few minutes ago about the lack of trust.  This goes back more than just the past couple of years.  This extends back a couple of decades.  That is one reason I think that some counties are particularly kind of skeptical. 

I tried to think of some solutions from the various ones that were offered earlier today.  In the case where the counties are appealing NOVCs before they have gone to audit.  I appreciate Director Burton’s concern about arguing over numbers that are not yet final that seems like a waste of time. But from the counties perspective they’ve been told that if they wait until their second opportunity which is to appeal after an audit finding, then it may be raised to them if you had this concern why didn’t you bring it up when you first had the opportunity.  That is always a weaker point to end up in legal proceedings if you didn’t object when you first had the chance.  So now some of them are objecting every time they get one because they’re afraid that later on down the line their case will be weakened because they didn’t raise an objection when they first had the chance to do it.  So, maybe we could have some kind of a deal where we could say, “okay county your objection is duly noted, now let’s just hold the phone until we get to final numbers after audit and we will revisit this issue”.  Now that doesn’t deal with the counties problem on perhaps needing revenue immediately if the NOVC results in a decrease in valuation.  So maybe you too have some kind of a state pot or something where you allocate funds to even out sudden swings of valuation, although that might not be necessary as if turns out like Director Burton said you don’t have the huge swings that were once characteristic of this problem.  Maybe another fix would be to require county consultation at certain steps of the process, specifically when the valuation method is chosen so you eliminate the problem Director Burton referred of the county coming back later and saying you should have picked a different method of valuation so we are going to appeal.  There is the year that exists now that they are not fully utilizing to sit with the audit finding.  Why I appreciate Director Burton’s desire to move forward and to dispose of these as quickly as possible, maybe if taking a little more time at that point to include the county and getting an agreement would eliminate later litigation, that would be worth it.  The third place would be before settlement.  We are hearing that that is occurring now on a de facto basis more or less, but maybe that should go into statute. 

What I didn’t have time to think of is what to do if you just come to a point where the county and the department cannot agree in these three instances and how would you resolve that, but I am willing to put my mind to it before the next meeting and see if we could come up with something.   But those might contribute to make the current system work more smoothly while still preserving the basic interest of entities.

County’s Summary (represented by Joe Evans – WCCA)

Mr. Chairman if I may I would like to just take a couple of minutes to summarize the counties position.  One thing that as mentioned there was a little bit of divergent in our response to Mrs. Burton’s proposals between Randy and I which we discussed at the lunch break.  The reason I am not for or against officially at this meeting any of those proposals is because although we have had some discussions about these at the commissioners level, we don’t have an association response.  I think I can tell you what they like or dislike, but it’s not an official response.  What Randy was talking about is of the ones that were presented, the one that would be best for the counties would be the one where they make their own assessed valuation.  That would be an easy way to solve the problem, but it also brings some other problems in.  So I don’t think we want to say we are for that. 

One of the things we also discussed in terms of the take-in-kind is this might create some other problems but maybe if we put it on the table there might be somebody who could figure out how to solve the problems that would be with it.  With the take-in-kind problem is obviously you have the operator saying I disbursed 100 barrels of oil, but the three people I gave it to say it was 120 or whatever it is.  We were thinking perhaps if you use the operator’s amount (100 barrels) and you use the valuation of what the take-in-kind person said they sold it for.  If they say they sold the barrel for $15 that is the price and you use the amount given to you by the operator.  That may bring some other problems I don’t know that issue well enough.  But at least you would have a single amount you could deal with and a single value you could deal with.  How those get reconciled I’m not sure.

As to the matter of trust I don’t want to make this a matter of trust that says we distrust the department.  I don’t think that is the issue.  When you bring up whether or not the schools look at the counties and what they do, you might remember several years ago that the school districts in conjunction with the counties joined together to work on this very issue because they were not getting the valuations they thought they should have.  We’ve mentioned that situation has changed a lot, as has the funding mechanism for the schools.  So you don’t see them involved with us now, but they used to be involved with the counties hand in hand with the counties in the valuation process.  What I would like to point out is we are talking about elected officials, county treasures, county assessors, county commissioners who are responsive to the needs of their citizens.  They are supposed to assess property and collect taxes and when they do that they have to have the best information possible when a citizen questions.  That is why we question this information at times.  I think to have more people involved in this process to look at the numbers is better than just a few in the long run.

In terms of a fund that the county could put together, you know the State of Wyoming when it has excess revenue like it does now is allowed to take it and put it into the Wyoming’s minerals trust fund and use it later for maybe when revenues aren’t so good.  Counties cannot do that.  Unless you’re applying it to a specific enterprise fund for a new jail or whatever it might be, you can’t do that even at times when you would like to charge that mill levy and save it for maybe when your assessed value is going to drop by a half or a third in future years.  It would be pretty tough to do that.  I think to do that on an each county level might not be wise, but to do that on a statewide level may have some merit.  Again, the amounts of money coming in and out of counties are based on the NOVC’s.  It doesn’t matter what the total state value is.  It doesn’t help an individual county to know that statewide the valuations are not negative.  If theirs is negative that is the one they are concerned with.

Committee’s Discussion and Decision

Q.                Are NOVC’s audited only upon appeal?  A.  Mr. Chairman, the NOVC itself is not audited because it’s a document that comes from the department.  What is audited is what created the NOVC.  Maybe Mike Geesey  (DOA) can comment on it.  Mike:  Mr. Chairman, we have a risk assessment model in place that allows us to evaluate whether we want to audit one company or not.  Size and dollars paid to the State of Wyoming are part of that.  As Mrs. Burton already pointed out if you take the top fifty taxpayers in the mineral industry you will get 90% of the dollars paid to the State of Wyoming.  We get all the dollars covered that way pretty well with the number of auditors we have.  We’re doing about 55 to 60 audits a year, so that leaves quite a few audits that we can do on some other risk assessment type things. 

One of the things you heard here today is an NOVC might come down and has a deduction of two million dollars.  I don’t think we have had one of those in a long, long time.  But if it did I can guarantee you in our assessment model that would pop out and we would be making sure that company got audited.  If it’s a smaller company with an NOVC reduction it could fall into our model.  We get a lot of the medium size and small size companies.  Our findings are mostly with the integrated companies.  The reason for that is the smaller companies especially in the oil and gas area receive a check from a major corporation they divide the check and send in the tax.  So unless there is an error we don’t have findings in those little companies even though we still audit them.  The trouble is, as you know our tax structure and taxing methodology is very, very complicated.  There is lots of room for disagreement on how it ought to be done.  We show up three years after the fact in some cases and say it looks to us like your accountant should have done it this way.  So, we have some additional potential findings.  We are in the mode of taking it to DOR and saying isn’t this the way we should have taxed it, with DOR agreeing or disagreeing.  If they agree with it, it becomes a finding.  In a lot of cases we have gone to the counties and said we are getting ready to have a finding we would like to discuss that with you.  We have come and talked to the counties.  We’ve allowed the county auditors to come in and take a look at our records.  I don’t think there has been a time where the county auditors have asked to look at the records that we haven’t taken the initiative to ask the taxpayer’s permission to show the records.  In our audits we have a lot of information.  A lot of that information never makes it to the end.  In other words, auditors have a question about something, and get that question resolved.  We still keep it in the file because we have to as part of our audit case.

When we do our objectives for our department our objective is to increase compliance.  We look at non-compliance.  In the mineral industry we are finding non-compliance in about three percent.  So that means for every dollar that should have gotten paid only three cents is not getting paid.  Now, by the time we get through the board sometimes that gets whittled down to maybe a cent and a half.  That tells me a couple of things: 1).  Industry is complying; however, there is some gray area.  2).  If half of it gets taken away at SBOE that tells me that my auditors are pretty aggressive.  I think those are real positive things that are going on in the state related to the taxing issue.  We might disagree with county, but we are the ones that have to supply the information, the testimony, the attorney and the cost to go ahead and run that issue through. 

Q.  Why do you assume the lack of trust?  Is that something established 100 years ago?  A.  Mr. Chairman, Representative, I think so.  I got in trouble for saying this about a month after I got this position and I’ll say it again, if we do our job they don’t need county auditors.  I think we are doing our job, but the counties have to believe it too.  I think in the past four or five years we’ve gone a long ways. 

Johnnie Burton:  Mr. Chairman, to answer a little bit of the questions asked by Representative Cohee, “when did that start”?  I’m not sure exactly when it started but I can tell when it was consolidated.  It occurred I think 20 years ago when in fact there was a question as to whether a particular company was reporting all of the volume sold.  When the county hired their own auditor, the audit was not on valuation it was on volume and that’s what the county folks have done.  They have looked at volume and sure enough companies were not reporting the same volume to everybody.  That’s when the DOR was reorganized so that we can do reconciliation on volume and we do.  We do three types of reconciliation today so there are no discrepancies left.  But the counties never looked at value.  However, once a county had hired an auditor it was a natural inclination to look further than just reconciling volume and that is how we got into valuation issues, which we didn’t have before, and the statutes did not allow counties to get into valuation until five years ago when they got the right to appeal to SBOE.  They are using this right to second-guess everything DOR and DOA do.

Sen. Hawks:  How about if we ask industry, counties and the DOR to get together talk about issues, get written proposals from industry and the counties and then at the August meeting do like we did at the June meeting walk through each item vote them up vote them down and decide what if anything we are going to do.

Rep. Hines:  We need to think about time frame.  I am on another select committee that is demanding time and assistance from the DOR.  I just want to make sure we give DOR enough time.  On this area the relationship with state and county I don’t know if you can legislate relationships or trust.  That is where I see the problem in this area.  I’m not sure if coming up with a bill will end the problem or not. 

Sen. Hawks:  The bottom line is if we can make some changes here and see if we can then establish a workable situation, at least improve on what we have here in hand now.  Along those lines we have a lot of issues in Director Burton’s Legislative 2001 Task Sheet.  It seemed to me that we ought to take this issue and combine with the last item, “the reporting tax liability for the operator, purchaser, take-in-kind” and tie that together with part of what we are talking about here right now.  We will then see what’s left and whether to ask an extension of management council or wait for the next interim.  Johnnie, what about point of valuation?

Mr. Chairman, we still have questions on point of valuation on oil and gas but also with coal.  We need to work on that.  What I would like to do Mr. Chairman is maybe once I know what package of bills comes out of the select committee and know what they say, then I can compare them to the fact sheet and find out exactly which issue would be resolved and which are left.  Then we can think about those for the next interim. 

Sen. Peck:  Q.  Mr. Chairman I would like to know Randy Fetterolf’s relationship with the county commissioners?  Are you an employee of the county, on retainer, salary, commission, who are you and how do you work?  A.  Mr. Chairman, Senator Peck we hire Randy on a contract basis at the County Commissioner’s Association.  It’s basically an hourly rate with a cap on top and then he does individual work for the counties on his own. 

Sen. Hawks:  Johnnie would you drop us a memo recapping what was done at today’s meeting and how we are going to proceed for the August meeting.  Industry and County if you would also send a memo stating the way you understood the way the select committee is proceeding. 

Per the select committee the meeting minutes are not public record until the committee has approved the minutes.

Johnnie:  Mr. Chairman the next meeting do you want one or two days?

Sen. Hawks:  Johnnie what do you see coming if we want to talk about the county/state relationship issue and the liens bill? Are liens going to take a full day?  A.  I don’t think so Mr. Chairman.  We are going to try and do as much work as we can ahead of time so we can send the committee proposed amendments, explanations, scenarios and try and address the issues that were raised today.  If we have enough time to develop that ahead of time then I suspect that maybe a couple of hours at the most you should be able to resolve the lien issue.  Then after that depending on what solution we pick I suspect strongly you will need to have time to have attorneys address what needs to be done to make that solution reality.  If we are going to talk about the collection of ad valorem taxes, all that depends on what you decide on the first one.  If suddenly you decide there is only going to be one tax and it’s going to be called severance we don’t have to worry about the remainder of the issue.  Sen. Hawks:  I think we need to look at the collection of ad valorem too.  Whichever way we go we still ought to have it on the table to talk about.  JB:  You could but it will be different.  For example Mr. Chairman, today DOR collects all the taxes for counties on sales tax and redistribute it every month.  Counties don’t have to worry about the time frame.  If you were to decide that there was a severance tax and you developed a formula for redistribution we could do it monthly, quarterly, it’s a different issue than changing the schedule on property tax the county collects.  As long as it’s an ad valorem tax I can tell you right away what major issue you are going to bump into.  We can do what Joe suggests, which is the county would receive their taxes monthly based on the previous year mill levy and then at the end of the year look at the new mill levy, and do a reconciliation and send a bill or refund.  That sounds simple, but you are going to bump into a question of uniformity and constitutionality because I think other taxpayers who pay property tax are given a year before they pay their tax.  Is this a problem?  I don’t know the answer to that.  We will have to get some AG to give us an answer.  Sen. Hawks:  Johnnie if we say it’s just not a doable deal just tell us that.  Get an opinion from the AG.  JB:  I’ll try to get information from the AG’s office.  I don’t know how long it will take.

Next meeting scheduled for August 1^st and 2^nd, 2001 State Capitol Room 302 Cheyenne.

Start time:  8:00am